Germany Backs Euro Rescue Fund to Set Stage for Next Steps

Germany's chancellor Angela Merkel center, prepares to cast her ballot in a vote to expand the powers of the European Financial Stability Facility (EFSF), in the lower-house of the German Parliament in Berlin, Germany, on Thursday, Sept. 29, 2011. Photographer: Michele Tantussi/Bloomberg

Sept. 29 (Bloomberg) -- German lawmakers approved an
expansion of the euro-area rescue fund’s firepower, freeing the
way for European officials to focus on what next steps may be
needed to stem the debt crisis.

The lower house of parliament passed the measure with 523
votes in favor and 85 against, granting the fund powers to buy
bonds in secondary markets, enable bank recapitalizations and
offer precautionary credit lines. It raises Germany’s guarantees
to 211 billion euros ($287 billion) from 123 billion euros. The
main opposition Social Democrats and Greens said before today’s
session in Berlin that they’d vote with Chancellor Angela
Merkel’s government, assuring passage.

The bill’s passage by Europe’s biggest economy allows euro-area officials to weigh further measures to bolster Greece and
stem investor concern that helped end the biggest three-day
rally in 16 months for European stocks. Options include seeking
further writedowns on Greek sovereign bonds, adding yet more
firepower to the rescue fund and a plan to protect banks.

Beefing up the fund bolsters defenses against the crisis,
setting the stage for German policy makers to focus on Greece’s
second bailout, said Holger Schmieding, chief economist at Joh.
Berenberg Gossler & Co. in London. That “may morph into a
debate about an orderly Greek default later this year, with a
haircut on Greek debt, an immediate recapitalization of Greek
banks, European guarantees for restructured Greek debt and
conditional fiscal support” for Greece, he said.

Recession Risk

Faced with German voter dismay at bailouts, coalition
members wary of granting more aid threatened to rebel against
the government line. The risk of defeat receded as international
concern grew that default by Greece would harm the euro region’s
core countries and tip the global economy back into recession.

“The German parliament is voting for too little, too
late,” Fredrik Erixon, head of the European Centre for
International Political Economy in Brussels, said by phone
before the ballot. “Merkel can’t possibly believe this is the
final point in a rescue package that will calm global markets
and lead us out of the crisis.”

Additional measures now in play include further leveraging
the rescue fund, known as the European Financial Stability
Facility; bringing forward the start of its permanent successor
by a year or more; reopening the second Greek rescue agreed in
July to increase the financial industry’s contribution; and a
safety net for Europe’s banks if default becomes inevitable.

Merkel, head of Europe’s largest economy and the biggest
country contributor to bailouts for Greece, Ireland and
Portugal, spent weeks cajoling dissenters in her coalition to
back the July 21 accord by euro-area leaders to expand the fund.

Coalition Dissenters

Provisions inserted into the bill to satisfy Germany’s
constitutional court and potential rebels will allow lawmakers
to vote on all new aid requests from the 440 billion-euro fund.
Leaders of the Free Democratic Party, Merkel’s junior coalition
ally that has flirted with an anti-bailout stance, said the bill
would pass on the strength of the coalition’s majority.

Merkel’s coalition has 330 seats in the 620-member lower
house. With a simple majority of 311 required to pass the bill,
she can afford 19 dissenters before depending on opposition
votes to win approval. The full breakdown of the vote will be
announced later today.

Expanding the fund requires approval in all 17 euro
countries. Nine have authorized the changes, including France,
Italy, Spain and Finland, where parliament voted yesterday.
Estonia also votes today and Austria holds its ballot tomorrow,
when Germany’s upper house of parliament will debate the fund.

Obama’s Call

Nearly two years into the debt crisis centered on Greece,
the U.S. is urging European governments to go further and show
more urgency. Europeans haven’t responded “as effectively as
they needed to,” President Barack Obama said during a
roundtable discussion at the White House yesterday.

Europeans “are aware of our responsibility,” German
Finance Minister Wolfgang Schaeuble said on Deutschlandfunk
radio today. “We have to take as many precautions as we can. We
must ensure that Europe doesn’t become the starting point of a
new, big financial and economic crisis in the world.”

If the rescue fund must be enhanced further, it will be
done in the “most efficient way,” Schaeuble said on Sept. 27.
He said that he had also asked all 17 euro states to come up
with “backstop plans” to shield banks if the crisis worsens.
The plans are to be outlined at the next euro-area finance
ministers’ meeting on Oct. 3, when they are due to decide
whether to release the next aid payment for Greece.

Greece’s lack of competitiveness means “insolvency on its
own won’t solve the root problem,” Frank Schaeffler, an FDP
lawmaker who said he planned to vote against the bill, said in
an interview yesterday. He called for Greece to leave the euro
region because rescue packages “won’t work.”

“I don’t believe the domino effect we hear about will
happen,” he said. “Investors will learn the bitter lesson that
their losses can’t be socialized by the taxpayer.”